Planning for the Sale of a Business

There are many reasons for choosing to sell a business, while there are also circumstances that dictate that it must be sold. Whether the sale has been contemplated over a period of time or is the result of an unexpected event, planning will help reduce the difficulty and trauma that can otherwise attend the sale process. The following thoughts should assist in planning for the sale of a business. They are presented in no order of priority or significance, and should be viewed in light of the circumstances surrounding each business. They are not intended to be all-inclusive, but only to demonstrate the benefits of planning. Also not addressed are tax matters, which are beyond the scope of this article. These matters are, however, very important and an attorney, accountant or other tax advisor should be consulted concerning those issues.

Organize a Sales Team

Develop a team of advisors. The size and complexity of the business will dictate the members of the team. It should, however, at a minimum, include an attorney and accountant. They can assist in legal, tax and valuation matters. Consideration should also be given to including an insurance agent, business broker, benefits or labor consultant and an appraiser. These advisors, and any others deemed necessary under the particular circumstances, should be consulted in developing specific objectives and in effectuating the sale of the business.

Develop Specific Objectives

It is important to establish and plan for particular objectives and needs. Determine why the business is being sold, whether this the right time to sell and what is expected from the sale. These objectives could include a particular “after tax” profit, deferred and secured payments, continued employment for the seller or the seller’s employees, or the sale or lease of real property owned “outside the business.” Make a “Wish List” and be objective rather than emotional. This will provide an understanding of specific objectives before becoming seriously involved in the sale process.

Establish Valuation Parameters

One of the most difficult aspects of the sale of a business will be to establish its fair market value or a range of values with which the seller will be satisfied. It is important to involve someone skilled in this activity such as an attorney, accountant, investment banker or industry specialist. Generally, the valuation of a business will be keyed to various factors related to book, liquidation or appraised value, earnings or dividend history, or a combination of these factors, and the application of multipliers or capitalization rates. There may also be industry-specific valuation methods or standards that can be of assistance. The purchase price, or some portion of the purchase price, may also be based on future earnings and provide for an earn-out feature to the sale.

Put the House in Order

Organize the business so as to present it in the best light. It is important to conduct a pre-sale audit to address any potential concerns, which will allow management to avoid surprises and embarrassment. Review matters such as the condition of the assets and third-party relationships. A seller may regret learning from a potential buyer of a problem, such as an environmental issue, of which the seller was unaware. This can be extremely distressing, especially if the sale is not consummated and the seller is left with “problem assets.” It will also help to anticipate the due diligence requests of potential buyers. Collect documents such as deeds, contracts and other materials that are important to the business. The preparation and review of these documents will greatly enhance the speed and efficiency of the sale process.

Determine Assets for Sale

Consideration should be given to identifying which assets are for sale. Consider what is important in the business and what is necessary to convey it as a going concern. Is it the hard assets, a particular location, or the employees that are valuable? If employees are involved, do you have employment agreements, and are they assignable? If the business relies upon other third-party relationships such as franchise or lease agreements, are those agreements assignable? Know what is valuable and how and to what extent those assets may be transferred.

Maintain Confidentiality

There may be aspects of the business that can be “pirated,” and any such loss greatly reduce the value of the business. Care should be taken to maintain the confidential aspects of the business and plan for that in connection with its sale. These matters could include financial reports, customer lists, factory designs and even the identity and importance of key employees. Consider the use of a confidentiality agreement in connection with “showing” the business, and understand the importance of its enforcement. Do not be reluctant to preclude potential buyers from using the assets if the business is not purchased.

Organize Sale Procedures

Decide how and to whom the business will be marketed. The means of selling the business could involve individual negotiations, an auction procedure or possibly the employment of a business broker. Most often the make-up of potential buyers and the circumstances surrounding the sale will dictate the method used. In any event, it is important to establish a “game plan” early in the process to help maximize the potential of accomplishing the objectives. Also consider preparing a “sales package” for distribution to potential buyers. This could include financial and other information deemed necessary to make an offer and a confidentiality agreement. A fee may be charged for the package to help discourage those not genuinely interested in pursuing a transaction and to help defray expenses.

Consider Limiting Liability

Most sellers do not want to “look over their shoulders” at continuing or contingent liabilities. Although there are some matters, such as environmental liabilities, that are very difficult to leave behind, there are many others that can be handled so as to minimize legal exposure. In establishing the “liability bubble,” consider obtaining releases from third parties (e.g., franchisors or lessors) and requesting liability limitations from the buyer. Also consider limiting the period in which the representations and warranties given in the purchase agreement will apply, and waiving rights of subrogation related to insurance coverage. Further consideration should be given to any other contingent liabilities and obtaining appropriate indemnification from the buyer. Insurance coverage might also be considered to deal with matters for which releases cannot be obtained or to cover other contingent liabilities (e.g., liability claims for pre-sale activities that do not surface until after the sale).

Identify Involved Third Parties

Most businesses involve some third-party relationships. As noted above, important assets in the business may be contracts such as employment agreements, leases, franchise agreements or favorable loans. Each of these involve third parties that may need to be consulted in connection with a potential sale, and consent to assignments obtained. It is also important to review and address this issue early in the process. Waiting until the latter stages of the sale process can prove disastrous if third parties add additional requirements or prohibitions to the assignment of their contracts.

View Life After the Sale

A seller may desire to maintain some involvement in the business, or the buyer may even require it to effectuate a smooth transition or to otherwise utilize perceived expertise. There may also be personal use or other assets that the buyer cannot or will not purchase. These issues should be considered in conjunction with the liquidation or other disposition of any remaining business entity. It may be that for reasons such as a collection of remaining accounts receivable, the business entity and its remaining assets should continue in existence at least for some period of time following consummation of the sale transaction.

The sale of a business may be one of the most difficult decisions a business owner must face in the life of a business. Regardless of the size of the business or the type of industry in which it operates, it is extremely important to plan for a potential sale. Business owners understand the importance of planning in the operation of their business and it is equally as important in their sale. A little planning will go a long way in making the process more enjoyable and, hopefully, more profitable.